STATE FINDS HUGE GAPS IN PUC’S BOOKS, FUNDS

Discrepancies are in the hundreds of millions after review of special funds

Sacramento 
The California Public Utilities Commission, charged with overseeing industries that charge more than $50 billion per year to utility customers, has failed to ensure that ratepayer dollars paid into certain special funds were accurately accounted for, state officials say.

Finance officials found some funds had revenue calculations that were off by as much as 73 percent, or $189 million, and program spending off by as much as 99 percent, or $212 million. Although no correlation has been proven, lawmakers worry that the faulty budget projections have contributed to recent rate increases.

The review covered 14 commission funds that collect surcharges on gas, electric and telephone bills. The money goes to subsidize low-income customers and for telephone services for the elderly, deaf and disabled.

After state parks officials were found to be hiding millions of dollars in special funds, Gov. Jerry Brown ordered his finance team to review all of the state’s more than 500 special funds. The Department of Finance probe uncovered discrepancies of more than $1 million in half of the special funds administered by the Public Utilities Commission.

Auditors said they found “significant weaknesses within CPUC’s budget operations which compromise its ability to prepare and present reliable and accurate budget information.”

Assemblyman Richard Bloom said the funds may have enormous deficits or significant surpluses where ratepayers have needlessly surrendered hundreds of millions of dollars.

“But because of poor accounting practices, we’re faced with a remarkable circumstance: We simply don’t know,” said Bloom, who chaired a recent Assembly budget subcommittee meeting on the matter.

The Santa Monica Democrat said the findings call into question the commission’s ability to account for the billions of dollars in accounts funded by ratepayers for electricity procurement, energy efficiency and a new program designed by the commission to begin funding clean energy technologies.

“It’s deeply troubling that an agency would have such dismal accounting and large amounts of public funds in apparent disregard of basic principles of good management,” Bloom said. “Best practices in management and accounting are widely known and understood, and there can be no excuse for not employing these practices.”

Given the limited scope of the finance audit, Bloom said he fears the issues uncovered have left deeper problems undiscovered.

“I hope that I am wrong,” he said. “But these concerns are all the more reason why the PUC must in my view act with urgency to restore confidence in this critical agency.”

PUC Executive Director Paul Clanon told lawmakers he agrees with nearly all of the findings in the audit, which he described as “painful for me to read.”

Clanon said the commission’s staffing levels may have been adequate a decade ago before the growth in special funds and the amount of money flowing through them. Today, that’s not the case, he said.

“The few people that we’ve had doing the processes, which were not fully documented, have been inadequately supervised and inadequately managed, including by me,” Clanon said. “Ultimately, I am the one who is responsible for the management of the commission, and for these problems, and for fixing them.”

Clanon said the commission is not waiting for next month’s deadline to begin correcting the problems. He said the commission has streamlined and clarified the management structure over its budget.

“I am responsible for all of it, and there is a clear line between me and the people doing the budget work now so that we no longer have any concern about people not knowing who is doing what,” he said.

The commission’s administration of special funds has grown to 14 from four in 2001-02. Management did not adequately respond to the challenges posed by the increased workload, according to the audit. The commission’s budget office consists of one employee responsible for all 14 funds. That led to tasks being farmed out to part-time workers who received limited to no guidance or oversight.

State finance officials found that over the past seven budget cycles, the commission’s forecasting models produced results that differed significantly from actual revenues, reimbursements and expenses. Finance officials observed that supervisory reviews were not always performed, increasing the risk of errors. They found an $81 million typographical error in one fund’s forecast. It was corrected.

The audit also found that a lack of proper record-keeping caused the commission to misrepresent the financial condition of its funds. Unrecorded transactions ranged from about $40,000 to $275 million.

Tiffany Roberts, senior analyst for energy and climate change at the Legislative Analyst’s Office, said the problems with the commission’s own budgeting and accounting practices raise concerns about its ability to effectively audit the books and records of the utilities it regulates. The PUC must every three years conduct audits of accounts that hold billions of dollars and were established by major power companies such as San Diego Gas & Electric and Pacific Gas & Electric to pay for activities mandated by the PUC. The commission is required to share the audits with the Board of Equalization.

At the hearing, Assemblyman Steven Bradford, D-Gardena, asked Clanon whether the commission was fully complying with the law.

“No,” Clanon said.

State records dating to 1977 show that the Board of Equalization has not received an audit from the commission.

“We’ve been in contact with the Board of Equalization,” Clanon said. “They don’t find the kinds of audits we do useful for their work. They do their own audits for their own work.”

Clanon maintained that no ratepayers were harmed and no program services were affected by the incorrect forecasts. He said he regretted that Brown and the Legislature were given an inaccurate picture of what the expenditures were likely to be.

Bloom and some colleagues disagree. They argue ratepayers may have been harmed if past rate increases were the result of mismanagement. Clanon has given some ground on that.

“The problems the budget audit discovered in the PUC’s processes had to do with the way that we forecast the expenditures in these programs,” he said. “And I do take your point that mistakes there can mean that increases that could have been rolled out over multiple years might have to be rolled out more quickly.

“So I do take that point, and to the extent that that’s a ratepayer harm, I think you’re right.”

The budget subcommittee has called for a full fiscal audit of the commission. A copy of its corrective plan is due to the subcommittee April 10 with another hearing planned for April 24.